RBA not driving bank rates - Clyne

The Reserve Bank of Australia's cash rate settings are not the main driver of banks' mortgage rates, National Australia Bank's chief executive, Cameron Clyne has told a Senate inquiry.

Mr Clyne told the Senate inquiry into banking competition that banks had got themselves into trouble with the public and politicians by previously moving in line with the RBA's rate moves when it wasn't necessarily the best thing to do.

The RBA's cash rate plays some role in banks' funding costs, but there are longer term influences that also play a role and have lead to recent moves of mortgage rates above the cash rate, Mr Clyne said.

"This is something we have created on our own," he said of the perceived link between the RBA's rate and lending rates.

NAB's executive director of finance Mark Joiner told the inquiry even if the RBA's cash rate rose 100 basis points, the bank would probably still need to raise it's mortgage rates further than that.

Mr Clyne also said that NAB was properly consulted about the federal government’s banking competition reforms.

The opposition and ANZ Banking Group have criticised the government for not doing enough to consult the banking sector about moves to scrap exit fees.

Mr Clyne contradicted those assertions, arguing the announcements made by Treasurer Wayne Swan on Sunday came as no surprise.

“The government has been quite consultative over the last 18 months,” Mr Clyne told a Senate inquiry hearing in Sydney, adding that none of the initiatives were especially surprising.

“The talk about the reform on exit fees has been discussed, and has been floated for some time.”

Mr Clyne said NAB had been given the opportunity to provide input into the policies, even if it wasn’t told of the exact announcement beforehand.

“On every element in the package, I can certainly say that we had had discussions with Treasury and the government over the last six to 12 months about the nature of the industry,” he said.

“I don’t feel there’s anything in there that we didn’t have an opportunity to provide input.”

Questioned on the billion dollar profits being posted by the big four banks, Mr Clyne said he could not deny they were big numbers.

But he said a crucial measure in NAB’s performance was return on equity, which has suffered in the last few years.

“Our return on equity is now well below what it was,” Mr Clyne said.

The bank’s return on equity is “not excessive by Australian standards” he said.

Mr Joiner added that allowing the return on equity to deteriorate further than it did during the financial crisis would have threatened the bank’s AA rating, which in turn would have added to the bank’s cost of funds and made it more difficult to operate.

Competition in the banking sector has nothing to do with the number of players, Mr Clyne said.

“It’s actually nothing to do with the number of players,” he said.

What impacted competition was the cost of searching for lenders and their rates, and the cost of switching lenders, he said.

Mr Clyne said wholesale funding costs had not returned to where they were before the onset of the global financial crisis.

He pointed out that costs were 15 to 20 basis points above the Reserve Bank’s cash rate before the crisis.

In the heat of the meltdown, costs rose to 200 to 250 basis points and had since settled at 140 to 145 basis points.